Tax Type
Corporation Income Tax
Description
Coalfield Employment Enhancement Tax Credit; Availability of credit to taxpayer making IRC Sec. 338(h)(10) election
Topic
Credits
Date Issued
12-22-1997
December 22, 1997
Re: Request for Ruling: Coalfield Employment Enhancement Tax Credit
Dear***************
This will reply to your letter of October 2, 1997 in which you request a ruling as to the application of the Coalfield Employment Enhancement Tax Credit to *********** (the "Taxpayer") pursuant to an l.R.C. § 338 (h)(10) election.
FACTS
The Taxpayer is a Virginia corporation. It purchases all the stock of Company A, a Virginia coal company effective August 1, 1997. Prior to the sale, Company A had been a wholly owned subsidiary of Virginia Company B. Company A wholly owned two Virginia coal companies, Company C and Company D, respectively. Companies C and D have generated Coalfield Employment Enhancement Tax Credits for calendar year 1996 and the first seven months of calendar year 1997.
The Taxpayer will make a l.R.C. § 338 (h)(10) election for tax purposes. The question is whether this election will effect Companies C and D's ability to claim the credit.
RULING
Public Document ("P.D.") 91-317, copy enclosed, provides that an l.R.C. § 338 (h)(10) federal election will mirror federal treatment as closely as possible, while ensuring that any Virginia tax accurately reflects the business activity in Virginia. An election under l.R.C. § 338 (h)(10) allows a purchaser of stock in a target corporation to obtain a stepped up basis in the target's assets as if there had been a direct purchase of the assets.
In the case of an l.R.C. § 338 (h)(10) election, the target corporation is not actually dissolved. In order to avoid potential double taxation, IRC § 338 (h)(10) allows the purchaser and seller to make a joint election, provided that the target and seller are part of an affiliated group of corporations that file a consolidated federal return. The result of the election is that a series of fictitious steps are deemed to have occurred:
-
- The target is deemed to have sold its assets, recognizing gain or loss that must be included in the selling group's consolidated federal return;
The target is deemed to have distributed all its assets in a complete liquidation to which IRC § 332 applies;
Any gain or loss on the sale of target stock incurred by the selling group is ignored.
- The target is deemed to have sold its assets, recognizing gain or loss that must be included in the selling group's consolidated federal return;
These companies remain intact after the acquisition by the Taxpayer. The sale of stock nor the federal election changes the legal nature of the companies C and D. Thus, the transaction does not result in the loss of the Coalfield Employment Enhancement Tax Credit for companies C and D.
An entity needs an economic interest in Virginia coal to claim the Coalfield Employment Enhancement Tax Credit. See Virginia Tax Bulletin 97-1, page 1, copy enclosed. In the case of tiered companies, the company which actually possesses the economic interest is entitled to the benefit, not its shareholders. See P.D. 97-409, copy enclosed. In the instant case, Companies C and D possess the actual economic interest. However, in instances where a combined or consolidated Virginia corporate income tax is filed which includes corporations which were not eligible to claim the credit, special rules apply. In such cases, the credit is utilized to offset the combined or consolidated Virginia corporate income tax liability. Any remaining credit, however, can only be used to offset other state taxes incurred by the corporations in the consolidated or combined group which actually earned the credit.
Refunds for previously paid taxes imposed by the Commonwealth which were incurred during the taxable year will be refunded at 100% of the face value up to the amount of the credit. If any credit remains, it will be refunded at 90% of the face value. Therefore, in cases where a combined or consolidated Virginia corporate income tax is filed which includes corporations which are not eligible to claim the credit, then the remaining credit may offset any other state taxes incurred by corporations in the group which actually earn the credit. If any credit then remains, 90% of it will be refunded.
I trust that this will answer your questions. If you have any questions, you may contact **** at ******** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13017B
Rulings of the Tax Commissioner